Economics Cost Of Production Questions Medium
Target costing is a cost management technique used in production that involves setting a target cost for a product or service during the design phase and then working towards achieving that cost during the production process. This approach has both advantages and disadvantages, which are discussed below:
Advantages of target costing in production:
1. Cost control: Target costing helps in controlling costs right from the design stage. By setting a target cost, companies can identify cost drivers and make necessary adjustments to ensure that the product can be produced within the desired cost range. This proactive cost management approach helps in avoiding cost overruns and improving profitability.
2. Customer focus: Target costing emphasizes the importance of meeting customer expectations while maintaining cost efficiency. By considering customer needs and preferences during the design phase, companies can develop products that are more likely to be successful in the market. This customer-centric approach can lead to increased customer satisfaction and market share.
3. Innovation and value creation: Target costing encourages innovation and value creation by challenging the traditional cost structures. It prompts companies to explore alternative materials, processes, and technologies to achieve the desired cost target. This can result in the development of innovative products that offer better value to customers.
Disadvantages of target costing in production:
1. Time-consuming: Implementing target costing requires significant time and effort. It involves detailed analysis, cost estimation, and continuous monitoring throughout the production process. This can be resource-intensive, especially for companies with limited resources or tight deadlines.
2. Potential quality compromise: In the pursuit of cost reduction, there is a risk of compromising product quality. Setting aggressive cost targets may lead to the use of cheaper materials or shortcuts in production processes, which can negatively impact the quality and durability of the product. This can result in customer dissatisfaction and damage the company's reputation.
3. Limited applicability: Target costing may not be suitable for all types of products or industries. It is more effective for products with high competition and price sensitivity, where cost control is crucial for market success. In industries where product differentiation or customization is more important, target costing may not be as relevant.
In conclusion, target costing in production offers advantages such as cost control, customer focus, and innovation. However, it also has disadvantages including the potential for quality compromise, time-consuming implementation, and limited applicability. Companies need to carefully evaluate the pros and cons before deciding to adopt target costing as a cost management strategy.